A recent spate of terrorist attacks has significantly raised the cost of political insurance, making it difficult for Kenyan businesses to get underwriters in the run up to next year’s general election.
Managers of some top Kenyan corporations said the cost of insuring political risk has risen by between 100 per cent and 1,000 per cent this year compared to last year as underwriters factor in terrorism attacks that have hit parts of the country in recent months.
“Some reinsurers are also turning away insurers and this has contributed to the non-renewal of some policies or a steep increase in premiums,” said Tom Gichuhi, the executive director of the Kenya Association of Insurers (AKI).
The market has become even more complicated for businesses seen as more vulnerable to political and terrorism attacks and those located close to areas that have been hit by explosives.
The steep rise in the cost of premiums is rooted in the fact that insurers have been forced to cede more premiums to re-insurers – who take part of the underwritten risks — making it imperative to raise the cost of premiums to protect their margins.
UAP, Jubilee, Heritage, and APA are some of the players in the nascent political and terrorism insurance market that rode the political risk cover buying wave that followed the 2008 post-election violence. A steep rise in cost of premiums and denial of cover to ‘high-risk’ clients exposes the economy to major losses in the event that they are attacked and are therefore not compensated for the losses.
“There is a heightened perception of terrorism and political risks in this market,” said Mr Gichuhi.
“The message here is that insurers see a higher probability of an outbreak of chaos similar to those experienced in early 2008,” he said.
Kenya’s top reinsurer, Kenya Re has, for instance, covered only nine local insurance companies underwriting terrorism and political risks, turning away more than 30 other applicants.
Industry sources said that apart from raising premiums and choosing less risky clients, insurers are also reducing the range of benefits accruing to clients under the terrorism and political risk covers.
Such covers have ordinarily come with compensation clauses for loss to property, equipment and business disruption.
The underwriters have traditionally covered such risk with guarantees of pre-determined gross profit margins but insurance buyers said this is being replaced by less attractive offers.
Analysts said the immediate consequence of the dip in uptake of the political risk covers will be a slowdown in new investments and business operations as companies seek to minimise their exposure.
“Insurers don’t want to roll out a lot of these policies this year and this will automatically lead to postponement of investments and temporary closure of some,” said Robert Bunyi, the chief executive of Mavuno Capital, a business advisory firm.
Mr Bunyi said that the uncertainty explains the perennial dip in Kenya’s economic growth in election years. In 2008, for instance, gross domestic output plummeted to 1.5 per cent from a high of seven per cent the year before.
This came as most sectors of the economy, including manufacturing, retail, agriculture, and tourism, took a beating from the chaos that followed the disputed December 2007 poll.
About 1,300 people were killed in the mayhem and billions of shillings worth of investments and assets destroyed.
Aggregate demand for goods and services also fell sharply as forced evictions and loss of jobs made their mark on the economy.
Heavy losses incurred by business that year prompted many local insurers to introduce terrorism and political risks covers which they are now issuing at much higher rates.
Africa Trade Insurance Agency (ATI) – one of the largest re-insurers on the continent — says insurers may be raising the cost of premiums and tightening the screening of clients because of the rising cost of re-insurance.
“Re-insurance premiums have risen by between 20 per cent and 30 per cent this year depending on geographical location,” said Souvik Banerjea,” a senior marketing officer at ATI.
In Kenya the mapping and pricing of risk is mainly hinged on the 2008 post-election violence hotspots.
Such considerations have, for instance, seen Nairobi hotels, shopping malls, and Kisumu-based businesses pay higher premiums based on perceived high risk levels.
In recent months, Kenya has become a target of Al-Shabab terror group that is unhappy with Nairobi’s support for Somalia’s UN-backed transitional government.
The latest attack occurred last month in Nairobi’s central business district where a blast in a shopping mall killed one person and injured 50 others.
Since September last year Kenya has victim of 10 blasts targeting buildings and public transport vehicles injuring more than 200 people and killing several others.
Kenya’s military entered Somalia late last year and are currently fighting the Al-Shabaab alongside other UN-backed forces.
An intelligence report earlier this month disclosed that the terror group is planning to blow up tall buildings in Kenya, a move that has raised the country’s risk profile and dampened the issuance of terrorism covers for fear of major losses. Analysts, however, note that losses from such insurance classes are often much less compared to other covers.
The AKI report for 2010 indicates that medical insurers incurred the highest loss ratio at 81.5 per cent, followed by private motor (74.9 per cent), commercial motor (58.8 per cent), and engineering (55.4 per cent).
Margins remain low in the insurance sector, with only a few of the firms making underwriting profits.
Most insurers mainly rely on investments to cushion their earnings from high claims in their core business.
The sector’s gross premiums rose 17.6 per cent to 63.4 billion in 2010 compared to Sh53.9 billion a year earlier.
Net claims rose by 30.7 per cent to Sh40 billion from Sh30.6 billion.
Kenya’s uptake of insurance remains low at less than five per cent driven by consumer apathy and high premiums that have restricted the underwriters activities to corporate Kenya and the middle class market.
Kenya Re’s managing director, Jadiah Mwarania, said reinsurers are likely to cover more local underwriters from next year should the general election slated for March come to pass smoothly.
“Taking on more insurers now means the risk will be sitting on our balance sheet at a time when we ourselves cannot pass on some of the risk to cautious international re-insurers,” he said.